Taking the long view in investment management

Recent years have seen a marked change in demand for pri­vate mar­ket invest­ing, not least due to the impact of mar­ket volatil­i­ty and geopo­lit­i­cal unrest on short-term invest­ment returns. A series of reports from var­i­ous man­age­ment con­sul­tan­cy firms have fore­cast a shift of some $4 to $6tn into pri­vate mar­kets between now and 2025.

How­ev­er, despite pent-up demand from the high net worth indi­vid­ual (HNWI) and small investor space for long-term invest­ment oppor­tu­ni­ties such as pri­vate equi­ty (PE), there were sev­er­al bar­ri­ers in the way of this sec­tor being able to suc­cess­ful­ly access pri­vate mar­kets.

Volatil­i­ty and the cur­rent geopo­lit­i­cal land­scape are influ­enc­ing small insti­tu­tions and their abil­i­ty to make invest­ment deci­sions. Volatil­i­ty means com­pa­nies are dis­tract­ed by the ups and downs of the mar­kets, and they may lack the time and capac­i­ty to think more strate­gi­cal­ly about invest­ing for the long term.

Cou­pled with that, the decline in val­u­a­tion of some pub­licly list­ed com­pa­nies is cre­at­ing the ‘denom­i­na­tor effect,’ in which investors can become over­ex­posed to pri­vate mar­kets. This restricts the abil­i­ty to com­mit fur­ther cap­i­tal, accord­ing to Titanbay’s head of invest­ments, Alex Bozoglou, mak­ing the need to man­age expo­sure more impor­tant.

Beyond the denom­i­na­tor effect, volatil­i­ty has also seen a rise in rapid fundrais­ing. This crowd­ed mar­ket makes it hard­er for insti­tu­tions to make deci­sions about fund­ing. Bozoglou says: “This might include need­ing to cut man­agers to reduce their expo­sure, or to engage in sec­ondary trans­ac­tions, sell­ing old com­mit­ments in order to be able to react.”

In volatile mar­kets, you absolute­ly need to have those diver­si­fied port­fo­lios to ensure that you can ride out the storms that come from time to time

Solv­ing the chal­lenges imposed by volatil­i­ty requires a need for port­fo­lio diver­si­fi­ca­tion and a reliance on assets that are less cycli­cal in nature, he adds. “Pri­vate equi­ty is a long-term asset class and that’s an advan­tage, because it takes away that short ter­mism. Small­er investors should increas­ing­ly be tak­ing a long-term view and ensur­ing a sus­tained and, if pos­si­ble, grow­ing allo­ca­tion to pri­vate mar­kets year after year,” Bozoglou says.

Cre­at­ing a port­fo­lio that is diver­si­fied, and takes a strate­gic, long-term view can enable com­pa­nies to look beyond spe­cif­ic geo­gra­phies or sec­tors. By answer­ing ques­tions around val­ue, growth poten­tial and pos­si­ble returns, port­fo­lio con­struc­tion takes a longer view and is less sus­cep­ti­ble to mar­ket volatil­i­ty.

A long-term invest­ment strat­e­gy should be planned care­ful­ly in order to avoid risk. “In volatile mar­kets, you absolute­ly need to have those diver­si­fied port­fo­lios to ensure that you can ride out the storms that come from time to time,” says Adam Har­ri­son, chief com­mer­cial offi­cer at Titan­bay.

He says illiq­uid­i­ty is one of the aspects of pri­vate mar­ket invest­ing that can help investors think and plan for the long term. “Long-term plan­ning is a fac­tu­al neces­si­ty of pri­vate mar­ket invest­ing and allows the pri­vate mar­ket com­po­nents of the port­fo­lio to be able to out­last short- and medi­um-term storms that hap­pen in the mar­ket,” Har­ri­son says.

Har­ri­son says: “Our view is that pri­vate equi­ty will con­tin­ue to per­form extreme­ly well, because PE is nim­ble, agile and can effect change. But we believe that there is a cohort of gen­er­al part­ners (GPs), of man­agers, that can do much bet­ter than that and do it more con­sis­tent­ly. So, it is our job to real­ly under­stand the strate­gies, under­stand the teams, how well they’re suit­ed, how expe­ri­enced they are in exe­cut­ing strate­gies and to also under­stand the port­fo­lio to make sure the port­fo­lio maps and match­es what is said about the strat­e­gy. That’s very, very impor­tant.”

Because of the cur­rent lev­el of volatil­i­ty in the mar­ket­place, the long-term strate­gic approach is becom­ing more acces­si­ble to small investors, par­tic­u­lar­ly HNWIs, sin­gle-com­pa­ny pen­sion funds, fam­i­ly offices, char­i­ties, endow­ments and the like. The appetite is there to mir­ror the invest­ment strate­gies – and returns – of the larg­er insti­tu­tion­al invest­ment funds.

Private equity and the smaller investor: key considerations

Portfolio construction

It is essen­tial that small­er insti­tu­tions plan their port­fo­lio con­struc­tion in the same way that larg­er insti­tu­tion­al investors would. It means real­ly think­ing about all the com­po­nents of pri­vate mar­ket port­fo­lio con­struc­tion and under­stand­ing what the end goal is for your port­fo­lio.

Market trends

Under­stand­ing the best trends being seen in the mar­ket­place and being selec­tive in which ones to pick up on and utilise.

Diversification

This entails not just focus­ing on pri­vate equi­ty but at all pri­vate mar­ket asset class­es. Small­er investors need to ensure that they’re build­ing a port­fo­lio which has expo­sure to a vari­ety of dif­fer­ent return pro­files that should per­form dif­fer­ent­ly depend­ing on the pre­vail­ing mar­ket envi­ron­ments.

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Q&A with Alex Bozoglou and Adam Harrison

Titanbay’s Alex Bozoglou, head of invest­ments, and Adam Har­ri­son, chief com­mer­cial offi­cer, dis­cuss why ensur­ing that small­er investors are able to access pri­vate mar­ket invest­ments has nev­er been so impor­tant

Have you seen any notable change in the lev­els of inter­est from small investors or the types of con­ver­sa­tion you are now hav­ing with them?

AH: Yes, this was one of the main moti­va­tions behind the launch of Titan­bay in 2019. My back­ground is in asset man­age­ment, ser­vic­ing insti­tu­tions, wealth man­agers etc. For a num­ber of years now, I’ve seen a sig­nif­i­cant increase in demand com­ing from that client base for pri­vate mar­ket invest­ing. One of the dri­vers behind this is that the risk/return pro­file of pri­vate mar­ket funds is very attrac­tive rel­a­tive to tra­di­tion­al asset class­es. Pri­vate mar­kets do pro­vide true diver­si­fi­ca­tion which has been dif­fi­cult to achieve in the tra­di­tion­al, bal­anced port­fo­lio and this has led to increased demand for alter­na­tive assets, specif­i­cal­ly pri­vate mar­kets that offer real dif­fer­en­ti­a­tion.

Why is man­ag­er selec­tion crit­i­cal to the suc­cess of the investor when it comes to pri­vate equi­ty?

AB: Man­ag­er selec­tion is a mul­ti­fac­eted thing. His­tor­i­cal track records are impor­tant. Investors should be look­ing for a strat­e­gy that has a sus­tain­able com­pet­i­tive advan­tage. Hope­ful­ly you will be in areas and sec­tors that have sec­u­lar long-term tail winds that are less cor­re­lat­ed to the macro, GDP etc. This can include tech­nol­o­gy, health­care – these are impor­tant struc­tur­al trends that will not change, even if we are faced with more tur­bu­lent times. Being in the right space is real­ly impor­tant.

Next, investors should be ask­ing about the manager’s sus­tain­able com­pet­i­tive advan­tage. By that, we mean that they are able to add more than just cap­i­tal; cap­i­tal is abun­dant. What we look for are those man­agers who can actu­al­ly effect change with­in a port­fo­lio, accel­er­ate growth, con­sol­i­date frag­ment­ed mar­kets, exe­cute on com­plex trans­ac­tions and add val­ue. We look for those skills and the man­ager’s abil­i­ty to do that con­sis­tent­ly.

There is also a sig­nif­i­cant dis­par­i­ty of per­for­mance between the top tier pri­vate equi­ty GPs and the rest of their peers. Giv­en the high­er risk/returns attached to the asset class, it is crit­i­cal to have access to the very best per­form­ing funds and strate­gies. It is also crit­i­cal to be able to build a bespoke port­fo­lio of invest­ment strate­gies that match an investor’s spe­cif­ic time hori­zon, lia­bil­i­ties and invest­ment objec­tives, which can vary great­ly whether you are a sin­gle com­pa­ny pen­sion fund, a fam­i­ly office or a char­i­ty.

What is the impor­tance of robust data and ana­lyt­ics tools? Is that espe­cial­ly impor­tant in the cur­rent land­scape?

AB: Our mis­sion is to bring insti­tu­tion­al qual­i­ty to small­er investors, both when it comes to access to those top-tier oppor­tu­ni­ties, insti­tu­tion­al-lev­el qual­i­ty access and to insti­tu­tion­al-lev­el qual­i­ty dili­gence. That’s some­thing that we do not com­pro­mise on. The way we work is the same way that large insti­tu­tion­al investors will work.

When it comes to look­ing at the data, what should investors be look­ing for? We do not stay at the head­line num­bers, that is not enough. Our approach is to under­stand the port­fo­lio and what’s dri­ving val­ue. What’s real­ly impor­tant is to make sure that the way that val­ue is being cre­at­ed adds up with the strat­e­gy; we’re look­ing for a sus­tain­able, con­sis­tent method­ol­o­gy. We are look­ing for com­pa­nies that are grow­ing, devel­op­ing and doing so in a sus­tain­able way.

Investors need out­stand­ing data and ana­lyt­ics tools, and this is only rein­forced in a more uncer­tain eco­nom­ic envi­ron­ment

When it comes to our plat­form, we want to enable and digi­tise as much as pos­si­ble. Our investors who are on the por­tal have access to the same tools that are also avail­able for larg­er, insti­tu­tion­al clients. Pri­vate mar­kets are not as trans­par­ent as pub­lic mar­kets and com­par­ing per­for­mance from fund to fund and between strate­gies ahead of mak­ing an invest­ment deci­sion can be over­whelm­ing­ly com­plex.

Mon­i­tor­ing the per­for­mance of an indi­vid­ual port­fo­lio in real time is also more dif­fi­cult in the absence of a share price, while mon­i­tor­ing cash-flow move­ments in a pri­vate market’s port­fo­lio is com­plex giv­en the uncer­tain­ty over tim­ing of both cap­i­tal calls and dis­tri­b­u­tions. For all these rea­sons, investors need out­stand­ing data and ana­lyt­ics tools, and this is only rein­forced in a more uncer­tain eco­nom­ic envi­ron­ment where a port­fo­lio posi­tion can move quick­ly.

What makes Titan­bay stand out in the cur­rent mar­ket? Why should small investors choose Titan­bay?

AB: This part of the mar­ket is very clear­ly under­served. At Titan­bay, our dif­fer­ence is in our dual approach, so lead­ing with the high-qual­i­ty GPs, the over-sub­scriber sit­u­a­tions, sit­u­a­tions that large insti­tu­tion­al investors want to be in, yet nev­er com­pro­mis­ing on qual­i­ty. The oth­er pil­lar of our think­ing is to cre­ate a well-con­struct­ed port­fo­lio that goes beyond just the basics of look­ing at geog­ra­phy and sec­tor, but one which cre­ates some­thing over a three-to-five-year peri­od and is well placed to with­stand shocks. We also want to edu­cate, and we want peo­ple to think about this excit­ing asset class in the fullest pos­si­ble way.

Even in the insti­tu­tion­al space, there is a lot of work which is cost­ly and cum­ber­some, with many unnec­es­sary man­u­al process­es. Our approach is to do this in a dig­i­tal­ly enabled way and for users to reap the ben­e­fits of the tech­nol­o­gy. From sub­scrip­tion all the way to the back-office func­tions, we make the entire process as seam­less as pos­si­ble. That’s some­thing that our whole indus­try needs, not just at the small­er end of the mar­ket but even at the larg­er insti­tu­tion­al investor lev­el as well.

A fur­ther dif­fer­en­tia­tor is our rela­tion­ship with Mer­cer. Mer­cer is one of the largest con­sult­ing groups in the world and our part­ner­ship with such a large firm is real­ly impor­tant for us. When it comes to the invest­ment side, we have access to the mar­ket-lead­ing ana­lyst research that Mer­cer can pro­duce, which is a very pow­er­ful resource for our plat­form. Mer­cer also has a strong abil­i­ty to secure pref­er­en­tial terms with funds due to its size and our rela­tion­ship with Mer­cer allows us to make use of those favourable terms, allow­ing us to bring costs down. That’s real­ly, real­ly pow­er­ful when it comes to pro­duc­ing a tru­ly effi­cient and cost-effi­cient solu­tion for our clients and that ben­e­fit is quite unique.

AH: It’s the com­bi­na­tion of two things that sets Titan­bay apart: our invest­ment propo­si­tion and our plat­form tech­nol­o­gy. We have some of the most expe­ri­enced pri­vate mar­ket investors on our invest­ment com­mit­tee who have been through mul­ti­ple macro-eco­nom­ic cycles. We can offer small­er investors a selec­tion of care­ful­ly curat­ed, best in class pri­vate mar­ket funds for each vin­tage year. We bring this to investors through a plat­form that removes the admin­is­tra­tive bur­den, edu­cates and informs deci­sion mak­ing.

For more infor­ma­tion please vis­it titanbay.com

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Pro­mot­ed by Titan­bay